Question

Which of the following is classified as an emergency fund?

Responses

$5,000 in a 0% interest checking account at your bank
$5,000 in a 0% interest checking account at your bank

$8,000 in a 1.5% interest account your bank
$8,000 in a 1.5% interest account your bank

$20,000 in a mutual fund with a 7% annual return
$20,000 in a mutual fund with a 7% annual return

$10,000 on loan from your bank

Answer 1

An emergency fund should be liquid and low-risk (cash or cash equivalents in a bank account). So the $8,000 in a 1.5% interest bank account is the correct choice. (The $5,000 in a 0% checking account would also be liquid and usable as an emergency fund, while the $20,000 mutual fund is too volatile and the $10,000 bank loan is a liability.)